Ownership Concentration, Monitoring and Optimal Board Structure

Clara Graziano and Annalisa Luporini ()

No 2005.14, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The paper analyzes the optimal structure of board of directors in a firm with ownership concentrated in the hands of a large shareholder who sits on the board. We focus our attention on the choice between one-tier board who performs all tasks and two-tier board where the management board is in charge of project selection and the supervisory board is in charge of monitoring. We consider the case in which the large shareholder sits on (and controls) the supervisory board but not the management board. We show that a two-tier structure can limit the interference of large shareholders and can restore manager’s incentive to exert effort to become informed on new investment projects without reducing the large, shareholder’s incentive to monitor the manager. This results in higher expected profits in a two-tier board than in one-tier board and the difference in profits can be sufficiently high to induce large shareholders to prefer a two-tier board despite the fact that in this case the manager selects his preferred projects rather than the project preferred by large shareholders. The paper has interesting policy implications since it suggests that two-tier boards can be a valuable option in Continental Europe where ownership structure is concentrated. It also offers support to some recent corporate governance reforms, like the so-called Vietti reform in Italy, that have introduced the possibility to choose between one-tier and two-tier structure of boards for listed firms.

Keywords: Board of directors; Dual board; Corporate governance; Monitoring; Project Choice (search for similar items in EconPapers)
JEL-codes: G34 L22 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-bec and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Ownership concentration, monitoring, and optimal board structure (2012)
Working Paper: Ownership Concentration, Monitoring and Optimal Board Structure (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2005.14

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